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Why Ukraine isn’t out of the woods just yet

Ukraine's simmering political crisis came to a head over the weekend with the resignation of Ukraine's prime minister. However, optimism over Ukraine's economic prospects and ability to secure further international funding in the wake of the move are likely to be short-lived, analysts say.

Prime Minister Arseniy Yatsenyuk is expected to formally tender his resignation Tuesday after announcing his decision via Twitter on Sunday, culminating months of infighting. As a parting shot, Yatsenyuk said he hoped political stability would be restored as the government tries to work through a shakey ceasefire in the country's eastern region.

The running battles between Yatsenyuk's People's Front and President Petro Poroshenko's party, renamed the Bloc of Petro Poroshenko - Solidarity (BPP) has held up much-needed loans from the International Monetary Fund.


Speaker of Ukrainian Parliament Volodymyr Groysman (R) has been nominated by President Petro Poroshenko's party to head the future cabinet.
Genya Savilov | AFP | Getty Images
Speaker of Ukrainian Parliament Volodymyr Groysman (R) has been nominated by President Petro Poroshenko's party to head the future cabinet.

Poroshenko has since nominated parliamentary speaker Volodymyr Groysman to take Yatsenyuk's place, which will have to be formally approved by parliament.

While Yatsenyuks' resignation had been expected, Ukraine's PFTS equity index made marginal gains on Monday, up 0.2 percent as of 1:30 p.m. London time, but was still down over 5 percent for the year.

The Ukrainian currency, the hyrvnia, rose 0.39 percent to 25 hyrvnia against the U.S. dollar, extending five days of gains for the Ukrainian currency.

The country has been walking a fine line with the IMF, which back in February said the country was being too slow in introducing government reforms, fighting corruption, implementing austerity measures and privatization plans. That's after the fund said it would extend $17.5 billion worth of financial aid to Kiev over four years back in 2015, as part of an international package totaling $40 billion.

"News that PM Arseniy Yatseniuk has resigned will likely create a bit of short-term optimism and positive market momentum this morning that the political impasse has been resolved," Timothy Ash, the head of Central Eastern Europe, Middle East & Africa credit strategy for Nomura International wrote in an analysis note Monday.


It's been suggested that some of the most important developments in the coming days will be appointments to the new cabinet, which could signal a willingness to tackle governmental reform and ultimately help secure a new financing round from IMF.

"Arguably the most important question following Yatsenyuk's departure is whether Finance Minister Natalie Jaresko will remain in her position," Daragh McDowell, Principal Analyst, Europe and Central Asia at Verisk Maplecroft, told CNBC via email.

Rumours in recent months suggested Jarekso might be tapped to take over as prime minister, but those rumblings have since been quashed.

"Jaresko is one of the last genuinely reformist and technocratic ministers in the government, and we expect that her departure would be interpreted negatively by Ukraine's western partners," McDowell explained.

If Groysman is formally approved as prime minister by parliament, he could find it relatively easy to implement macro-economic reforms and back-track on "populist impulses" like gas price hikes introduced in recent weeks, Ash explained. However, anti-graft measures will be tougher to tackle, he said.

Poroshenko is already suffering a blow after being named in the Panama Papers for having set up an offshore firm in the British Virgin Islands in 2014 while the country was in the grips of a war with pro-Russian separatists in the country's eastern region.

Nonetheless, creditors might be willing to give Ukraine the benefit of the doubt amid a cabinet reshuffle, with a new tranche potentially signed off over the next one to two months, Ash suggested, but would require much stronger commitment to reforms by Poroshenko and his BPP party which has so far failed to deliver.

Otilia Dhand, Senior Vice President at Teneo Intelligence, said in a research note that tranche could total $1.7 billion. However, she was similarly pessimistic about the release of funding going forward.

"Going on Ukraine's previous record, with no real change in parliamentary dynamics and the less technocratic profile of the cabinet under Groysman, the benchmarks will be difficult to achieve, making further delays in funding likely," Dhand said.